The Ichimoku Cloud, also known as Ichimoku Kinko Hyo, is a technical analysis indicator that was developed by Japanese journalist Goichi Hosoda in the late 1960s. It provides a comprehensive view of price action and helps traders identify potential trends, support and resistance levels, and optimal entry and exit points in the market.
The indicator consists of several components:
- Tenkan-sen (Conversion Line): This line is calculated by taking the average of the highest high and the lowest low over the past 9 periods. It is often used as a short-term trend identifier.
- Kijun-sen (Base Line): This line is calculated similarly to the Tenkan-sen, but using the past 26 periods. It is generally considered a medium-term trend indicator.
- Senkou Span A (Leading Span A): This is the average of the Tenkan-sen and Kijun-sen, plotted 26 periods ahead. It forms the upper boundary of the Ichimoku cloud (or "kumo") and can act as both support and resistance.
- Senkou Span B (Leading Span B): This is calculated using the past 52 periods and plotted 26 periods ahead. It forms the lower boundary of the cloud and also acts as support and resistance.
- Kumo (Cloud): The area between Senkou Span A and Senkou Span B represents the cloud. When the price is above the cloud, it indicates a bullish trend, and when it is below the cloud, it indicates a bearish trend. The thickness of the cloud can also provide additional information about market volatility.
- Chikou Span (Lagging Span): This is the closing price of the current period plotted 26 periods behind. It helps traders determine critical support and resistance levels based on historical price action.
Traders often look for various signals generated by the interaction between these lines or levels to make their trading decisions. These signals can include bullish or bearish crossovers of the Conversion Line and Base Line, price breaking through the cloud, or the Chikou Span crossing the price chart.